Fund Administration Glossary: 300+ Terms Every Emerging Manager Needs to Know

A B C D E F G H I J K L M N O P Q R S T U V W Y Z #

A

A Round

A financing event whereby venture capitalists invest in a company that was previously financed by founders and/or angels. The “A” is from Series “A” Preferred stock.

Accredited Investor

Defined by Rule 501 of Regulation D, an individual (i.e. non-corporate) “accredited investor” is either a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase OR a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year. For the complete definition of accredited investor, see the SEC website.

Accrued Interest

Refers to the interest that has been earned but not yet paid or received on a debt instrument, such as a bond or loan. It represents the portion of interest that has accumulated over time since the last interest payment date. When a private equity firm acquires a company with outstanding debt, it may need to account for the accrued interest as part of the acquisition price or subsequent financial calculations.

Acquisition

When one company buys controlling stake in another company. Can be friendly (agreed upon) or hostile (no agreement). The establishment of control in one business entity by another, often with the assistance of private equity. Third party acquisition is a common exit mechanism for private equity funds. The process of gaining control, possession or ownership of a private portfolio company by an operating company or conglomerate.

Acquisition for Expansion Financing

Capital provided to a company to finance its controlling interest in another entity for growth purposes.

ACRS: Accelerated Cost Recovery System

The IRS approved method of calculating depreciation expense for tax purposes. Also known as Accelerated Depreciation.

Actual market value (AMV)

A company’s share price, determined by valuing share options in light of certain restrictions found in shares issued to minority shareholders like employees. Restrictions include vetoes on transfers, risk of forfeiture and pre-emption provisions, among others. The AMV may be significantly lower than the unrestricted market value (UMV).

Adjustment Condition

An adjustment condition occurs if the company does not close on an equity investment in the company for a minimum of $xxx, net of brokerage fees, on or before a series of other predetermined events, i.e. delivery of term sheet to preferred stockholders.

ADR: American Depositary Receipt (ADR’s)

A security issued by a U.S. bank in place of the foreign shares held in trust by that bank, thereby facilitating the trading of foreign shares in U.S. markets.

Advisory Board

A committee of LPs within an individual fund delegated by the GP to give clearance and guidance on any situations involving a possible conflict of interest.

Agent

A market intermediary that assists in the structuring of a private equity transaction.

Agile

A philosophy of software development that promotes incremental development and emphasizes adaptability and collaboration.

AIV

Alternative Investment Vehicle

Allocation

The process of distributing or assigning investment capital to specific funds, sectors, or investment opportunities within a private equity firm's portfolio.

Alternative Assets

This term describes non-traditional asset classes. They include private equity, venture capital, hedge funds and real estate. Alternative assets are generally more risky than traditional assets, but they should, in theory, generate higher returns for investors.

Alternative investments

Investment assets or strategies that fall outside the traditional categories of stocks, bonds, and cash. They encompass a broad range of non-traditional investment opportunities such as private equity, venture capital, hedge funds, real estate, commodities, infrastructure, and other non-publicly traded assets.

American Institute of Certified Public Accountants (AICPA)

The institute governs the practice of public accountancy except for standards related to the audit of public companies, which are defined by the Public Company Accounting Oversight Board (PCAOB)

Amortization

An Accounting procedure that gradually reduces the book value of a tangible or a definite intangible asset through periodic charges to income.

AMT: Alternative Minimum Tax

A tax designed to prevent wealthy investors from using tax shelters to avoid income tax. The calculation of the AMT takes into account tax preference items.

Angel Financing

Capital raised for a private company from independently wealthy investors. This capital is generally used as seed financing.

Angel Groups

Organizations, funds and networks formed for the specific purpose of facilitating angel investments in start-up companies.

Angel Investor

A person who provides backing to very early-stage businesses or business concepts. Angel investors are typically entrepreneurs who have become wealthy, often in technology-related industries. A high net worth individual active in venture financing, typically participating at an early stage of growth. Also known as an informal investor. Individual who provides a small amount of capital to a startup for a stake in the company. Typically precedes a Seed Round and usually happens when the startup is in its infancy. A high-net-worth individual or fund that provides financial backing – primarily to early-stage startups or entrepreneurs – in exchange for equity ownership in a company.

Annex fund

A separate fund formed by the LPs of a fund to provide a pool of top-up capital when the reserves of the fund have proved inadequate, with the aim of avoiding the issues raised by cross-fund investing.

Anti-dilution

A clause built into the terms of shares, warrants and convertible loan notes that shields investors from dilution. Even when new shares are created and issued, the investors’ stake in the company remains the same. The most common anti-dilution provisions apply when shares are sold to new investors at a price lower than that paid by earlier investors.

Anti-dilution provisions

Contractual measures that allow investors to keep a constant share of a firm’s equity in light of subsequent equity issues. These may give investors preemptive rights to purchase new stock at the offering price.

Archangel

Usually an outsider hired by a syndicate of angel investors to perform due diligence on investment opportunities and coordinate allotment of investment duties among members. Archangels typically have no financial commitment to the syndicate.

Articles of association (AoA)

A set of documents laying out rules for running a company, agreed upon by its shareholders, directors and company secretary. May include information on how shares are issued, what rights are granted to shareholders and how the option pool is authorized. Also known as articles of incorporation in some jurisdictions.

Asset Allocation

The strategic distribution of investment capital across different asset classes within a private equity portfolio. It involves determining the optimal mix of investments in various asset categories, such as private equity funds, real estate, hedge funds, and other alternative investments.

Asset-backed loan

Loan, typically from a commercial bank, that is backed by asset collateral, often belonging to the entrepreneurial firm or the entrepreneur.

AUM

The total value of assets that a private equity firm manages on behalf of its investors.

Automatic conversion

Immediate conversion of an investor’s priority shares to ordinary shares at the time of a company’s underwriting before an offering of its stock on an exchange.

Average Company Financing

The dollar value of total capital invested divided by the total number of investee firms in a given period.

Average IRR

The arithmetic mean of the internal rate of return.

B

B Round

A financing event whereby professional investors such as venture capitalists are sufficiently interested in a company to provide additional funds after the “A” round of financing. Subsequent rounds are called “C”, “D”, and so on.

B2B

Business to business. This describes a business that is targeting another business with its product or services. B2B technology is also sometimes referred to as enterprise technology. This is different from B2C which stands for business to consumer, and involves selling products or services directly to individual customers.

Balance Sheet

A condensed financial statement showing the nature and amount of a company’s assets, liabilities, and capital on a given date.

Balanced Fund

A private equity fund strategy whereby a wide range of investment targets is pursued, as distinct from a Specialized Fund.

Bankruptcy

An inability to pay debts. Chapter 11 of the bankruptcy code deals with reorganization, which allows the debtor to remain in business and negotiate for a restructuring of debt.

Barbell Strategy

Investment strategy by limited partners that primarily make commitments to buyout firms on (1) the micro/small and (2) the large/mega ends of the market; while mostly eschewing the vast array of middle-market opportunities.

BATNA (best alternative to a negotiated agreement

A no-agreement alternative reflecting the course of action a party to a negotiation will take if the proposed deal is not possible.

Bear Hug

An offer made directly to the Board of Directors of a target company. Usually made to increase the pressure on the target with the threat that a tender offer may follow.

Benchmark

The process by which a startup company measures their current success. An investor measures a company's growth by determining whether or not they have met certain benchmarks. For example, company A has met the benchmark of having X amount of recurring revenue after 2 years in the market.

Benchmarking

Comparing returns of a portfolio to the returns of its peers; in private equity, fund performance is benchmarked against a sample of funds formed in the same vintage year with the same investment focus.

Best Efforts

An offering in which the investment banker agrees to distribute as much of the offering as possible, and return any unsold shares to the issuer.

Blind Pool

A type of investment fund where investors commit capital to a fund without having knowledge of the specific investments the fund will make. The term "blind" implies that investors are essentially investing in the fund based on trust in the fund manager's expertise and investment strategy.

Blue Sky Laws

A common term that refers to laws passed by various states to protect the public against securities fraud. The term originated when a judge ruled that a stock had as much value as a patch of blue sky.

Board Of Directors

A group of influential individuals, elected by stockholders, chosen to oversee the affairs of a company. A board typically includes investors and mentors. Not all startups have a board, but investors typically require a board seat in exchange for an investment in a company.

Board of directors (BoD)

A group of individuals elected by a company’s shareholders to oversee its development and influence important decisions such as hiring or terminating the CEO. May include investors, mentors and C-suite executives.

Board resolution

The formal approval of an agreement or decision made by a company’s board of directors. Used to adopt an EMI share plan and authorize company management to issue options.

Book Value

Book value of a stock is determined from a company’s balance sheet by adding all current and fixed assets and then deducting all debts, other liabilities and the liquidation price of any preferred issues. The sum arrived at is divided by the number of common shares outstanding and the result is book value per common share.

Bootstrapped

A term used to describe a company financed by its own revenue or the founder’s personal capital instead of investors, crowdfunding or bank loans. A company is bootstrapped when it is funded by an entrepreneur's personal resources or the company's own revenue. Evolved from the phrase "pulling oneself up by one's bootstraps."

Bootstrapping

Means of financing a small firm by employing highly creative ways of using and acquiring resources without raising equity from traditional sources or borrowing money from the bank.

Break Up Fee

Requires the party responsible for a break-up in an acquisition to pay the other party a negotiated amount of liquidated damages.

Bridge Financing

Capital provided on a short-term basis to a company prior to its going public or its next major private equity transaction. A limited amount of equity or short-term debt financing typically raised within 6-18 months of an anticipated public offering or private placement meant to “bridge” a company to the next round of financing.

Bridge loan

A short-term fundraise providing a startup with immediate capital to cover expenses until the next major round of funding. Also known as a swing loan; typically no longer than 12 months. Also known as a swing loan. Short-term loan to bridge the gap between major financing.

Broad-Based Weighted Average Ratchet

A type of anti-dilution mechanism. A weighted average ratchet adjusts downward the price per share of the preferred stock of investor A due to the issuance of new preferred shares to new investor B at a price lower than the price investor A originally received. Investor A’s preferred stock is repriced to a weighed average of investor A’s price and investor B’s price. A broad-based ratchet uses all common stock outstanding on a fully diluted basis (including all convertible securities, warrants and options) in the denominator of the formula for determining the new weighed average price. Compare Narrow-Based Weighted Average ratchet and Chapter 2.9.4.d.ii of the Encyclopedia.

Brokers

Private individuals or firms retained by early-stage companies to raise funds for a finder’s fee. (compare, broker-dealer)

Burn Out / Cram Down

Extraordinary dilution, by reason of a round of financing, of a non-participating investor’s percentage ownership in the issuer.

Burn rate

A measurement of how fast a company with a negative cash flow is spending its capital. The rate at which a company expends net cash over a certain period, usually a month.

Business Development Company (BDC)

A vehicle established by Congress to allow smaller, retail investors to participate in and benefit from investing in small private businesses as well as the revitalization of larger private companies.

Business Plan

A document that describes the entrepreneur’s idea, the market problem, proposed solution, business and revenue models, marketing strategy, technology, company profile, competitive landscape, as well as financial data for coming years. The business plan opens with a brief executive summary, most probably the most important element of the document due to the time constraints of venture capital funds and angels.

Buyout

A common exit strategy. The purchase of a company's shares that gives the purchaser controlling interest in the company. The acquisition of a controlling stake in a company by a private equity firm, typically involving a significant amount of debt financing

Buyout Capital

A specialized form of private equity, characterized chiefly by risk investment in established private or publicly listed firms that are undergoing a fundamental change in operations or strategy (see: Event Transaction, Middle Market). Buyout funds are often called such, even if their mandates are not exclusively buyout- related.

C

CAGR

Compound Annual Growth Rate. The year over year growth rate applied to an investment or other aspect of a firm using a base amount.

Call Option

The right to buy a security at a given price (or range) within a specific time period.

Cap table

A capitalization table, or cap table, is a list of all the securities a company has issued, who owns them (stakeholders) and under what terms. Common shares, preferred shares, options, warrants and convertible loan notes are all types of security that may feature on the cap table. Stakeholders listed may include founders, investors, advisors and employees.

Capital

Monetary assets currently available for use. Entrepreneurs raise capital to start a company and continue raising capital to grow the company.

Capital (or Assets) Under Management

The amount of capital available to a fund management team for venture investments. The total dollar value of capital resources, both invested and un- invested, in a private equity fund or market as a whole.

Capital Available for Investment

The total dollar value of Capital Under Management less those resources that have already been invested by a private equity fund. Also known as liquidity.

Capital Call

The act of a private equity fund “calling down” previously pledged capital from its limited partners in order to execute an investment. Also known as a draw down – When a venture capital firm has decided where it would like to invest, it will approach its investors in order to “draw down” the money. The money will already have been pledged to the fund but this is the actual act of transferring the money so that it reaches the investment target.

Capital Commitment

Refers to the contractual agreement made by an investor to contribute a specified amount of capital to an investment fund over a certain period.

Capital Gains

The difference between an asset’s purchase price and selling price, when the selling price is greater. Long-term capital gains (on assets held for a year or longer) are taxed at a lower rate than ordinary income. The proceeds obtained on the sale of assets.

Capital gains tax (CGT)

A tax on the profit (gain) made by disposing of an asset that has increased in value. Only applies to gains above the tax-free allowance. Each jurisdiction carries different tax rates and exclusions.

Capital Under Management

The amount of capital, or financial assets that a venture capital firm is currently managing and investing.

Capitalization Table

Also called a “Cap Table”, this is a table showing the total amount of the various securities issued by a firm. This typically includes the amount of investment obtained from each source and the securities distributed — e.g. common and preferred shares, options, warrants, etc. — and respective capitalization ratios.

Capitalize

To record an outlay as an asset (as opposed to an Expense), which is subject to depreciation or amortization.

Capped Notes

Refers to a "cap" placed on investor notes in a round of financing. Entrepreneurs and investors agree to place a cap on the valuation of the company where notes turn to equity. This means investors will own a certain percentage of a company relative to that cap when the company raises another round of funding. Uncapped rounds are generally more favorable to an entrepreneur/startup.

Captive funds

A venture capital firm owned by a larger financial institution, such as a bank.

Carried Interest

A general partner’s share of the capital gains from a fund, generally 20%. Most limited partnerships include a provision that allows the general partner to receive carry only after the limited partners have achieved a preferential rate of return on their original commitment. A bonus entitlement accruing to an investment fund’s management company. Carried interest becomes payable once the investors have achieved repayment of their original investment in the fund, plus a defined hurdle rate, if applicable. (Varies according to each unique Limited Partnership Agreement)

Carried Interest Accrued

The amount of carried interest payable accrued for payment to the General Partner.

Carried Interest Earned

The amount of carried interest earned by the General Partner, regardless of payment.

Carried Interest in Escrow

The amount of carried interest in escrow as of the current period.

Carried Interest Paid

The amount of carried interest paid as of the current period.

Cash flow

The net balance of cash moving in and out of a business at a specific point in time. Positive cash flow means a company has more money moving into it than out, while negative cash flow indicates the reverse.

Cash Position

The amount of cash available to a company at a given point in time.

Cashless exercise

A transaction that allows an employee to exercise share options without having to pay cash upfront to cover the exercise price. Also known as a same-day sale, a cashless exercise must be pre-organized with a broker.

Catch-up

A contractual provision in a limited partnership agreement that allows the general partner (GP) to receive a larger share of profits after a certain threshold or hurdle rate has been achieved. The catch-up provision ensures that the GP receives a proportionate share of profits once the limited partners (LPs) have received their preferred return. It allows the GP to 'catch up' to a certain percentage of the profits before the remaining profits are distributed according to the agreed-upon profit- sharing ratio. This mechanism aligns the incentives of the GP and LPs, incentivizing the GP to maximize returns for the benefit of all parties involved.

Change of Control Provision

A clause in a business contract which stipulates that if ownership of a majority of the equity of a company changes hands, then the other party to the contract has a right to cancel, usually without liability for paying any compensation.

Chapter 11

The part of the Bankruptcy Code that provides for reorganization of a bankrupt company’s assets.

Chapter 7

The part of the Bankruptcy Code that provides for liquidation of a company’s assets.

Claim Dilution

A reduction in the likelihood that one or more of the firm’s claimants will be fully repaid, including time value of money considerations.

Clawback

A clawback obligation represents the general partner’s promise that, over the life of the fund, the managers will not receive a greater share of the fund’s distributions than they bargained for. Generally, this means that the general partner may not keep distributions representing more than a specified percentage (e.g., 20%) of the fund’s cumulative profits, if any. When triggered, the clawback will require that the general partner return to the fund’s limited partners an amount equal to what is determined to be “excess” distributions.

Clawback Provision

Guarantees that the stated profit allocation defined in the LPA is met at the end of a partnership’s term with respect to the Limited Partners.

Cliff

A point in time after which employee equity on a vesting schedule begins to vest. Also known as a “vesting cliff”, it is typically fixed at one year after the grant date.

Closed Fund

A private equity fund that has finished taking commitments from limited partners and held its “final close.”

Closed-end Fund

A type of fund that has a fixed number of shares outstanding, which are offered during an initial subscription period, similar to an initial public offering. After the subscription period is closed, the shares are traded on an exchange between investors, like a regular stock. The market price of a closed-end fund fluctuates in response to investor demand as well as changes in the values of its holdings or its Net Asset Value. Unlike open-end mutual funds, closed-end funds do not stand ready to issue and redeem shares on a continuous basis.

Closing

An investment event occurring after the required legal documents are implemented between the investor and a company and after the capital is transferred in exchange for company ownership or debt obligation. The final stage of a transaction or deal where all the necessary legal, financial, and administrative processes are completed, and the investment or acquisition is officially concluded.

Co-investment

The syndication of a private equity financing round or an investment by individuals (usually general partners) alongside a private equity fund in a financing round. Two or more investors in a given transaction. Also known as syndication. The average rate of co-investment is the total number of investments made in the total number of deals in a given period.

Collar Agreement

Agreed upon adjustments in the number of shares offered in a stock-for-stock exchange to account for price fluctuations before the completion of the deal.

Commitment Period

The period of time within which the fund can make investments as established in the LPA for the fund.

Committed Capital

The total dollar amount of capital pledged to a private equity fund.

Committed Funds or Raised Funds

Capital committed by investors. Cash to the maximum of these commitments may be requested or drawn down by the private equity managers usually on a deal-by- deal basis. This amount is different from invested funds for three reasons. First, most partnerships will initially invest only between 80% and 95% of committed funds (possibly even less). Second, it may be necessary in early years to deduct the annual management fee that is used to cover the cost of operation of a fund. Third, payback to investors usually begins before the final draw down of commitments has taken place. To the extent that capital invested does not equal capital committed, limited partners will have their private equity returns diluted by the much lower cash returns earned on the uninvested portion. Avoiding this situation is the main reason for the Partners Group over-commitment model, which aims to keep Partners Group products as close 100% invested as possible

Common share

A security that represents company ownership and allows the grant holder certain rights, such as electing the board of directors and voting on corporate policies. Also known as an ordinary share.

Common Stock

A unit of ownership of a corporation. In the case of a public company, the stock is traded between investors on various exchanges. Owners of common stock are typically entitled to vote on the selection of directors and other important events and in some cases receive dividends on their holdings. Investors who purchase common stock hope that the stock price will increase so the value of their investment will appreciate. Common stock offers no performance guarantees. Additionally, in the event that a corporation is liquidated, the claims of secured and unsecured creditors and owners of bonds and preferred stock take precedence over the claims of those who own common stock.

Company Buyback

The redemption of private stock by the management of a Portfolio Company. This is a common Exit Mechanism for private equity funds. The redemption of private of restricted holdings by the portfolio company itself. In essence the company is buying out the VC’s interest.

Consolidation

Also called a leveraged rollup, this is an investment strategy in which a leveraged buyout (LBO) firm acquires a series of companies in the same or complementary fields, with the goal of becoming a dominant regional or nationwide player in that industry. In some cases, a holding company will be created to acquire the new companies. In other cases, an initial acquisition may serve as the platform through which the other acquisitions will be made.

Contributions

The total capital that a Limited Partner paid into the fund.

Conversion Ratio

The number of shares of stock into which a convertible security may be converted. The conversion ration equals the par value of the convertible security divided by the conversion price.

Conversion Rights

Rights by which preferred stock “converts” into common stock. Usually, one has this right at any time after making an investment. Company may want rights to force a conversion upon an IPO; upon hitting of certain sales or earnings’ targets, or upon a majority or supermajority vote of the preferred stock. Conversion rights may carry with them anti-dilution protections.

Convertible Debt

This is when a company borrows money with the intent that the debt accrued will later be converted to equity in the company at a later valuation. This allows companies to delay valuation while raising funding in its early stages. This is typically done in the early stages of a company's life, when a valuation is more difficult to complete and investing carries higher risk.

Convertible loan note (CLN)

A short-term debt that is converted into equity shares at a later date. Typically allows the investor to receive a discounted share price based on the company’s future valuation. The debt may sometimes be repaid or cancelled instead of being converted.

Convertible Security

A bond, debenture or preferred stock that is exchangeable for another type of security (usually common stock) at a pre-stated price. Convertibles are appropriate for investors who want higher income, or liquidation preference protection, than is available from common stock, together with greater appreciation potential than regular bonds offer.(See Common Stock, Dilution, and Preferred Stock).

Corporate Charter

The document prepared when a corporation is formed. The Charter sets forth the objectives and goals of the corporation, as well as a complete statement of what the corporation can and cannot do while pursuing these goals

Corporate Fund

A private equity fund that is a division or subsidiary of a financial or industrial corporation.

Corporate Venturing

Venture capital provided by [in-house investment funds of]large corporations to further their own strategic interests.

Corporation

A legal, taxable entity chartered by a state or the federal government. Ownership of a corporation is held by the stockholders. Two forms: “C Corp.” and “S Corp.” – the latter of which provides flow-through taxation.

Co-Sale Provisions or Rights

Allows investors to sell their shares of stock in the same proportions and for the same terms as the founders, managers, or other investors, should any of those parties receive an offer.

Covenant

A protective clause in an agreement.

CPC

The Capital Pool Company program is a corporate finance tool for emerging companies offered through the TSX Venture Exchange. The CPC Program pairs an eligible private company with a public Capital Pool Company which serves as the vehicle for taking the private company public.

Cross-fund Investing

Where a firm invests in the same company at different times from different funds, i.e., uses their current fund towards a financing round in a company which forms part of the portfolio of one of their earlier funds.

Crowdfunding

The process of funding a venture by raising small amounts of capital from a large number of people (the crowd), usually through an online platform.

Cumulative Dividends

Dividends that accrue at a fixed rate until paid are “Cumulative Dividends” which are payments to shareholders made with respect to an investor’s Preferred Stock. Generally, holders of Preferred Shares are contractually entitled to receive dividends prior to holders of Common Stock. Dividends can accumulate at a fixed rate (for example 8%) or simply be payable as and when determined by a company’s Board of Directors in such amount as determined by the board. Because venture backed companies typically need to conserve cash, the use of Cumulative Dividends is customary with the result that the Liquidation Preference increases by an amount equal to the Cumulative Dividends. Cumulative Dividends are often waived if the Preferred Stock converts to Common Stock prior to an IPO but may be included in the aggregate value of Preferred Stock applied to the Conversion Ratio for other purposes. Dividends that are not cumulative are generally called “when, as and if declared dividends.”

Cumulative Preferred Stock

A stock having a provision that if one or more dividend payments are omitted, the omitted dividends (arrearage) must be paid before dividends may be paid on the company’s common stock.

Cumulative Voting Rights

When shareholders have the right to pool their votes to concentrate them on an election of one or more directors rather than apply their votes to the election of all directors. For example, if the company has 12 openings to the Board of Directors, in statutory voting, a shareholder with 10 shares casts 10 votes for each opening (10×12= 120 votes). Under the cumulative voting method however, the shareholder may opt to cast all 120 votes for one nominee (or any other distribution he might choose). Compare Statutory Voting.

Current Period

The current three month quarterly period.

D

Data Room

A secure, digital location where potential investors can review confidential information on a target company, including financial statements, compensation agreements, intellectual property and client contracts.

Deal Flow

The measure of the number of potential investments that a fund reviews in any given period.

Deal Structure

An Agreement made between the investor and the company defining the rights and obligations of the parties involved. The process by which one arrives at the final term and conditions of the investment.

Debt Financing

This is when a company raises money by selling bond, bills, or notes to an investor with the promise that the debt will be repaid with interest. It is typically performed by late-stage companies.

Deemed Management Fee

The amount of the management fee waived.

Deficiency Letter

A letter sent by the SEC to the issuer of a new issue regarding omissions of material fact in the registration statement.

Demand Rights

Contemplate that the company must initiate and pursue the registration of a public offering including, although not necessarily limited to, the shares proffered by the requesting shareholder(s).

Depreciation

An expense recorded to reduce the value of a long-term tangible asset. Since it is a non-cash expense, it increases free cash flow while decreasing the amount of a company’s reported earnings.

Dilution

A decrease in existing shareholders' ownership percentage of a company, as a result of the company issuing new equity. A reduction in the percentage ownership of a given shareholder in a company caused by the issuance of new shares.

Dilution Protection

Applies to convertible securities. Standard provision whereby the conversion ratio is changed accordingly in the case of a stock dividend or extraordinary distribution to avoid dilution of a convertible bondholder’s potential equity position. Adjustment usually requires a split or stock dividend in excess of 5% or issuance of stock below book value. Share Purchase Agreements also typically contain anti-dilution provisions to protect investors in the event that a future round of financing occurs at a valuation that is below the valuation of the current round.

Director

Person elected by shareholders to serve on the board of directors. The directors appoint the president, vice president and all other operating officers, and decide when dividends should be paid (among other matters).

Disbursement

The investments by funds into their portfolio companies. The actual dollar amount flowing from a private equity fund or funds to a company in a given transaction.

Disclosure Document

A booklet outlining the risk factors associated with an investment.

Disinvestment Period

Period in which the general partners focus on realizing returns on the fund’s assets.

Disruption

Also known as disruptive innovation. An innovation or technology is disruptive when it "disrupts" an existing market by doing things such as: challenging the prices in the market, displacing an old technology, or changing the market audience.

Distressed debt

Corporate bonds of companies that have either filed for bankruptcy or appear likely to do so in the near future. The strategy of distressed debt firms involves first becoming a major creditor of the target company by snapping up the company’s bonds at pennies on the dollar. This gives them the leverage they need to call most of the shots during either the reorganization, or the liquidation, of the company. In the event of a liquidation, distressed debt firms, by standing ahead of the equity holders in the line to be repaid, often recover all of their money, if not a healthy return on their investment. Usually, however, the more desirable outcome is a reorganization, which allows the company to emerge from bankruptcy protection. As part of these reorganizations, distressed debt firms often forgive the debt obligations of the company, in return for enough equity in the company to compensate them. (This strategy explains why distressed debt firms are considered to be private equity firms).

Distributed to Committed Capital (DCC)

The Ratio of total distributions to Limited Partners to date, to the total committed capital of the fund. As defined in the current GIPS Standards (www.gipsstandards.org/standards/current/Pages/index.aspx), any recallable distributions should be included in the numerator of this ratio.

Distributed to Paid in (DPI)

The ratio of money distributed to Limited Partners by the Fund, relative to contributions. As defined in the current GIPS Standards (www.gipsstandards.org/standards/current/Pages/index.aspx), any recallable distributions should be included in the numerator of this ratio. Any reinvested capital (resulting from recallable distributions) should be included in the denominator.

Distribution

The return of capital and profits from an investment or fund to the investors or limited partners (LPs). It represents the cash or asset payments made by the private equity fund to its investors as a result of successful exits, such as initial public offerings (IPOs), mergers, or sales of portfolio companies.

Distribution Waterfall

The method used to allocate and distribute investment profits among various stakeholders, such as limited partners and general partners, in a fund or investment structure. The distribution waterfall outlines the order and priority in which cash flows are distributed. It typically consists of different tiers or layers that determine how profits are shared, taking into account factors such as preferred returns, hurdle rates, catch-up provisions, and carried interest. The distribution waterfall ensures a systematic and structured approach to distributing investment proceeds in accordance with the agreed-upon terms and priorities outlined in the fund's partnership agreement.

Distributions

Cash and/or securities paid out to the Limited Partners from the Limited Partnership.

Diversification

The process of spreading investments among various different types of securities and various companies in different fields.

Divestiture Financing

Capital provided to a company to facilitate the sale of its interest in a product, division or subsidiary to another business entity.

Dividends

Cash payments or distributions made by a portfolio company to its shareholders, which can include private equity firms and other investors. These dividends are typically a portion of the company's profits that are distributed periodically to the shareholders.

Down round

Funding raised at a lower company valuation than the previous financing round.

Drawdown

The process of accessing committed capital from investors by the general partner (GP) of a private equity fund. When a fund is established, investors commit to providing a certain amount of capital over a specified period. The GP then draws down or calls capital from the investors as needed to make investments or meet fund expenses. The drawdown process is typically structured with specific capital call notices and timing agreed upon in the fund's legal documentation. Drawdowns allow the GP to deploy capital into investments and manage the fund's operations effectively.

Dry Close

Venture capital closing where you do NOT issue a capital call.

Dry Powder

The available capital or uninvested funds that a private equity firm has at its disposal to make new investments. It represents the amount of capital that has been committed by limited partners (LPs) but has not yet been deployed into investments. Dry powder is an important metric as it indicates the firm's capacity to make acquisitions or investments in new opportunities.

Due diligence

The process of examining a company’s operations and finances, carried out by a potential investor or buyer. Includes financial records, product, team, contracts and supply chains. An analysis an investor makes of all the facts and figures of a potential investment. Can include an investigation of financial records and a measure of potential ROI.

E

Early Stages of Development

Seed stage: A developing business entity that has not yet established commercial operations and needs financing for research and product development. Start-up: A business in the earliest phase of established operations and needs capital for product development, initial marketing and other goals. Other early stage: A firm that has begun initial marketing and related development and needs financing to achieve full commercial production and sales.

EBITDA

Stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It is a financial metric used to assess the operating performance and profitability of a company.

Employee share ownership plan (ESOP)

A government-approved share scheme for awarding share options to employees. Entitles the company and employees participating in the scheme various tax benefits.

Enterprise

The term enterprise typically refers to a company or business (i.e. an enterprise tech startup is a company that is building technology for businesses).

Entrepreneur

An individual who starts a business venture, assuming all potential risk and reward for his or herself.

Entrepreneur In Residence (EIR)

A seasoned entrepreneur who is employed by a Venture Capital Firm to help the firm vet potential investments and mentor the firm's portfolio companies.

Equity

Any type of security that represents ownership in a company, such as common shares, growth shares, share options and warrants.

Equity Financing

The method of raising capital by selling ownership stakes or shares in a company to investors in exchange for investment funds.

Equity management

The process of managing company ownership. Includes tracking and reporting changes in ownership, maintaining and submitting compliant documentation to local authorities, communicating with stakeholders and consulting the board of directors.

Exercise

The process of converting an option agreement’s underlying security, such as an employee purchasing company shares at the predetermined strike price.

Exercise price (or strike price)

The fixed price (per share) paid by an employee grant holder to exercise their share options, as defined in the option agreement. Calculated using the actual market value (AMV) of the company’s shares, and typically heavily discounted from the investor share price.

Exercise window

The window of time a former employee has to exercise their options after leaving a company. Exercise windows are set by the company and can range from 30 days to 10 years.

Exit

The process of divesting or selling an investment made by a private equity firm. It represents the point at which the firm seeks to realize its investment and generate returns for its investors. An event – such as an IPO, merger or acquisition – that marks the sale or change in control of a company, in which shareholders exit by liquidating their equity.

F

Fair market value (FMV)

The estimated value of an asset if it were sold on the open market today. The fair market value of a private company’s common shares is determined by its 409A valuation for US tax purposes.

Final Return

The total net profits or overall financial return generated by a private equity investment or fund at the end of its life cycle.

First Close

Refers to the initial closing of a private equity fund, during which the fund manager secures the first round of commitments from limited partners (LPs). It marks the point at which the fund manager can start deploying the raised capital into investments.

Flotation

The process of taking a private company public by offering its shares for sale to the public on a stock exchange. It is also known as an initial public offering (IPO).

Fully diluted equity

The total number of shares that each stakeholder would hold if all of the company’s legal obligations towards its stakeholders were fulfilled. Assumes the conversion of convertible loan notes into equity and the exercise of all options.

Fund

An investment vehicle comprising capital commitments from limited partners, which are raised by a general partner. Funds typically have specific sectors, regions and deal amounts that they target for their investments.

Fund Of Funds

A mutual fund that invests in other mutual funds.

Fund of Funds (FoF)

An investment fund that invests in other private equity funds, rather than directly in companies.

Fundraising

The process of raising capital from investors for a private equity fund.

G

General Partner (GP)

The entity in a limited partnership that maintains responsibility for all debts and obligations. The GP manages all aspects of the fund, including investment decisions, and earns a management fee and percentage of the carried interest (assuming the fund is successful).

GP Catch-up

A contractual provision in a limited partnership agreement that allows the general partner (GP) to receive a larger share of profits until a predetermined threshold is reached. The catch-up provision typically comes into effect after the limited partners (LPs) have received their preferred return.

Grant

An agreement providing equity – or rights to obtain equity in the future – to the grant holder. Options and warrants are examples of grants.

Gross Return

The total return generated by an investment or portfolio before deducting any fees, expenses, or taxes.

Ground Floor

A reference to the beginning of a venture, or the earliest point of a startup. Generally considered an advantage to invest at this level.

Growth Equity

Investments made in established companies that have a proven track record and are looking to expand or grow.

Growth Equity Investment

A growth equity investment provides relatively mature companies with capital to fund expansion or restructuring in exchange for an equity position, typically a minority stake. As opposed to a buyout, growth equity investors do not take control of the business.

Growth share

A type of security that enables the shareholder to benefit from future growth in a company's value. The "growth" depends on a specific valuation hurdle; a sale above the hurdle triggers the growth shares to become valuable.

H

Harvest

The process of realizing the value of an investment or exiting from an investment by selling or divesting the investment.

High Net Worth Individual (HNWI)

An individual with a high net worth, typically considered a potential investor in private equity funds.

Holding Period

The length of time that a private equity firm holds an investment before exiting.

Hurdle

Refers to a specified minimum rate of return that an investment must achieve before the general partner (GP) can start receiving a share of profits. It is a threshold that the investment's performance needs to surpass to trigger the GP's participation in the profits. The hurdle rate is typically set in the limited partnership agreement and serves as a mechanism to align the interests of the limited partners (LPs) and the GP. Once the investment surpasses the hurdle rate, the GP may start receiving a predetermined percentage of profits, often referred to as the GP catch-up or carried interest.

I

Incubator

An organization that helps develop early stage companies, usually in exchange for equity in the company. Companies in incubators get help for things like building their management teams, strategizing their growth, etc.

Initial Public Offering (IPO)

The first time a company offers its shares on a stock exchange, to be bought and sold in the public market. This is an enormous step for most companies and represents the culmination of the startup journey.

Institutional Investor

An entity that invests significant capital on behalf of other individuals or organizations. These investors are typically large financial institutions, such as pension funds, insurance companies, endowments, foundations, and sovereign wealth funds.

Internal Rate of Return (IRR)

A financial metric used to measure the profitability and performance of an investment over time. It represents the annualized rate of return that an investment is expected to generate based on its cash flows, including both cash inflows and outflows.

Internal Revenue Service (IRS)

The US federal government’s revenue service, responsible for collecting US federal taxes and implementing the Internal Revenue Code (IRC).

Investment Bank

A financial institution that serves as an agent or underwriter for security issuances. Additionally, some investment banks act as broker/dealers and provide advisory services for mergers, acquisitions, restructurings and other transactions.

Investment Memorandum

A legal document that is circulated to potential investors to explain the objectives, risks, and investment terms surrounding a funding round.

Investment Period

A predetermined time period during which a private equity fund is allowed to make new investments. It is a specified window of time, typically outlined in the fund's limited partnership agreement, during which the general partner (GP) can deploy the committed capital into various investment opportunities.

IPO

Initial public offering. The first time shares of stock in a company are offered on a securities exchange or to the general public. At this point, a private company turns into a public company (and is no longer a startup).

J

J-Curve

A graphical representation of the fund's cash flow pattern over time. It depicts the initial negative cash flow followed by a positive trend.

K

Key Person

An individual, often specified in the limited partnership agreement, who plays a critical role in the management and decision-making of the private equity firm.

Know your customer (KYC)

A security practice carried out by companies to verify the identity of clients in compliance with financial and legal regulations to avoid online fraud. KYC is a central part of the due diligence that anti-money laundering (AML) programs require.

L

Late Stage

The final stage of venture capital investing involving companies that have achieved strong revenue growth and are near exit. As late stage investments are less risky, the rate of return is typically lower. Rounds Series C and later are typically categorized at late stage.

Late Stages of Development

Expansion: An established or near-established company that needs capital to expand its productive capacity, marketing and sales. Acquisition/Buyout: An established or near-established firm that needs financing to acquire all or a portion of another business entity for growth purposes, such as an Acquisition for Expansion Financing. Turnaround: An established or near-established company that needs capital to address a temporary situation of financial or operational distress. Other Stage: Includes Secondary Purchase, or the sale of portfolio assets among investors, and working capital. Staggered Board: This is an anti-takeover measure in which the election of the directors is split in separate periods so that only a percentage (e.g. one-third) of the total number of directors come up for election in a given year. It is designed to make taking control of the board of directors more difficult.

Lead Investor

A venture capital firm or individual investor that organizes a specific round of funding for a company. The lead investor usually invests the most capital in that round. Also known as "leading the round."

Leaver (bad)

An employee who leaves a company under specific circumstances, such as gross misconduct, which means they are no longer entitled to any of their vested options. Companies may set their own conditions for bad leavers.

Leaver (good)

An employee who leaves a company under normal circumstances and has the right to purchase any vested shares within a fixed window. Exercise windows are typically set at 90 days from the employee’s departure.

Leveraged Buyout

When a company is purchased with a strategic combination of equity and borrowed money. The target company's assets or revenue is used as "leverage" to pay back the borrowed capital.

Leveraged Buyout (LBO)

The acquisition of a company using a significant amount of borrowed money, with the assets of the acquired company often serving as collateral.

Limited Partner (LP)

An investor, usually an institution or accredited investor, that contributes capital to a private equity limited partnership.

Limited Partnership

Legal term for the relationship between a general partner and its various limited partners.

Limited Partnership Agreement (LPA)

A legally binding contract that outlines the terms and conditions of the partnership between the general partner (GP) and the limited partners (LPs). It governs the rights, responsibilities, and obligations of each party involved in the private equity fund. The LPA typically covers various aspects, including the investment strategy, capital commitments, profit sharing, management fees, governance structure, decision-making processes, reporting requirements, and terms for exiting investments. It serves as the foundation for the relationship between the GP and LPs, providing clarity on the fund's operations, investment objectives, and the rights and protections of the investors.

Liquidation

The process of dissolving a company by selling off all of its assets (making them liquid).

Liquidation preference

An investment contract clause which determines which shareholders are paid first and how much they receive when a company reaches a liquidity event.

Liquidity

The extent to which a security can be sold or purchased in the market at a price that reflects its current value.

Liquidity event

A process in which a company’s equity is converted into cash, allowing shareholders to realize the value of their investment by selling their shares. There are several different types of liquidity events, including an IPO, secondary transaction, merger or acquisition.

M

Management Buyout (MBO)

The acquisition of a company by its existing management team, often with the support of a private equity firm.

Management Fee

A fee charged by general partners to limited partners in a fund that typically ranges from 0.5% to 3% of the called capital. Ostensibly, the fees are used to pay for the day-to-day operations of the fund.

Market cap

The open market valuation of a publicly traded company. Indicates the market’s perception of the company’s prospects as it reflects what investors are willing to pay for its stock.

Merger

The combination of two or more companies to form a single entity. It involves the consolidation of assets, operations, and ownership structures of the merging companies.

Mergers and acquisitions (M&A)

A merger is the combination of two or more separate companies to form a new, larger organization. An acquisition is when one company buys a stake of more than 50% in another company to take majority ownership and control over it.

Mezzanine Financing

A form of hybrid capital typically used to fund adolescent and mature cash flow positive companies. It is a form of debt financing, but it also includes embedded equity instruments or options. Companies at this level, which are no longer considered startups but have yet to go public, are typically referred to as "mezzanine level" companies.

N

NDA

Non-disclosure agreement. An agreement between two parties to protect sensitive or confidential information, such as trade secrets, from being shared with outside parties.

Net Asset Value (NAV)

The total value of a private equity fund's assets after deducting liabilities. It represents the net worth or equity of the fund. The NAV is typically calculated periodically, such as on a quarterly or annual basis, and is an important measure of the fund's financial health and performance.

Net Return

The total return on investment generated by a private equity fund after accounting for all expenses, fees, and costs incurred during the investment period.

Notice of exercise

Written notice of a grant holder's desire to buy or sell the underlying security of their option contract. Also known as an exercise notice, this document specifies the number of options being converted.

Notice of option grant

A document given to each option holder outlining the details specific to their issuance (e.g. the number of options granted, vesting schedule, exercise rules and strike price).

O

Open-end Fund

A type of investment fund that allows investors to buy and sell shares at any time, without any restrictions on the number of shares available.

Option agreement

A legal contract that details the conditions that the option holder must meet in order to purchase shares, and explains the terms associated with the purchase.

Option pool

A board-approved allocation of shares set aside by a company for employee equity awards. Also known as an incentive pool, it typically ranges between 10% and 20% of total company ownership.

Overhang

The amount of committed but undeployed capital or uninvested commitments in a private equity fund. It represents the difference between the total capital commitments made by limited partners (LPs) and the capital actually invested by the general partner (GP) in portfolio companies.

P

Participation preference

A contract clause giving a grant holder certain rights, including dividends and liquidation preferences. Typically introduced during an investment round.

Partnership Agreement

A legally binding contract that establishes the terms and conditions of the partnership between the general partner (GP) and the limited partners (LPs).

Pivot

The act of a startup quickly changing direction with its business strategy. For example, an enterprise server startup pivoting to become an enterprise cloud company.

Placement Agent

A financial intermediary or firm that assists private equity funds in raising capital from potential investors. The placement agent acts as a middleman between the fund managers (general partners) and institutional investors (limited partners).

Portfolio Company

A company in which a private equity fund has made an investment.

Pre-emption rights

The right of first refusal offered to existing shareholders when new shares are issued. Often this is a contractual obligation related to anti-dilution preferences, designed to protect each stakeholder’s current ownership percentage in the company.

Preferred share

A share classification that gives shareholders a priority claim over earnings whenever dividends or assets are distributed. Also known as a preference share.

Preferred Stock

A stock that carries a fixed dividend that is to be paid out before dividends carried by common stock.

Private Equity

A form of investment that involves the acquisition and ownership of shares or equity in privately-held companies or assets. Private equity firms raise capital from institutional investors and high-net-worth individuals to form investment funds.

Private Markets

Refers to the segment of the financial market where investments are made in privately-held companies or assets that are not publicly traded on stock exchanges.

Pro Rata Rights

Also known as supra pro rata rights. Pro rata is from the Latin 'in proportion.' A VC with supra pro rata rights gives him or her the option of increasing his or her ownership of a company in subsequent rounds of funding.

Proof Of Concept

A demonstration of the feasibility of a concept or idea that a startup is based on. Many VCs require proof of concept if you wish to pitch to them.

Q

Quoted Distributions

The periodic payments made by a private equity fund to its investors, typically in the form of cash or additional securities. These distributions are based on the fund's realized gains, such as profits from the sale of portfolio companies or other exit events.

R

Realized Proceeds

The actual cash or value received by a private equity fund from the sale or liquidation of its investments.

Recapitalization

Refers to the process of restructuring a company's capital and financial structure. It involves making changes to the company's debt and equity mix to improve its financial position, liquidity, or capital structure. Recapitalization can take various forms, such as raising new debt, issuing equity, refinancing existing debt, or repurchasing shares.

Refresher grant

An additional equity award, typically offered to high-performing or long-standing employees.

Restricted stock unit (RSU)

A type of equity award granted to employees upon meeting certain conditions. RSUs do not need to be exercised; instead, shares are issued automatically once the conditions are met.

Reverse vesting

An inverse vesting process, where shares are granted upfront but may be repurchased by the company if the shareholder leaves during the vesting period. Typically applied to founder equity awards.

Right of first refusal (ROFR)

A contractual right giving a company’s existing investor the option to take part in a transaction before the company enters that transaction with a third party.

ROI

This is the much-talked-about "return on investment." It's the money an investor gets back as a percentage of the money he or she has invested in a venture. For example, if a VC invests $2 million for a 20 percent share in a company and that company is bought out for $40 million, the VC's return is $8 million.

Round

Startups raise capital from VC firms in individual rounds, depending on the stage of the company. The first round is usually a Seed round followed by Series A, B, and C rounds if necessary. In rare cases rounds can go as far as Series F, as was the case with Box.net.

Round modelling

The process of calculating the potential impact of new funding on a company’s cap table, including the dilution of existing shares. Also see scenario modelling.

Run rate

A measurement of the financial performance of a company based on current financial information. Can be used to predict future performance.

S

SAAS

Software as a service. A software product that is hosted remotely, usually over the internet (a.k.a. "in the cloud").

Safe harbor

A concept under the US Internal Revenue Code providing that 409A valuations performed by an independent provider are presumed to be reasonable.

Scenario modelling

The process of examining and evaluating possible future scenarios for a company, such as new funding rounds. Used to understand how a scenario may impact company ownership or shareholder payouts. Also see round modeling.

Secondary Market

Refers to a market where existing private equity investments are bought and sold between investors, rather than directly from the original fund or issuer. It allows investors to buy and sell their ownership interests in private equity funds or directly in private companies.

Secondary Public Offering

When a company offers up new stock for sale to the public after an IPO. Often occurs when founders step down or desire to move into a lesser role within the company.

Secondary transaction

The sale of existing shares in a private company. Secondaries can take many forms, from a 1:1 share transfer between two stakeholders to multiple buyers, multiple sellers and even unknown buyers sourced from a secondary marketplace.

Sector

The market that a startup companies product or service fits into. Examples include: consumer technology, cleantech, biotech, and enterprise technology. Venture Capitalists tend to have experience investing in specific related sectors and thus tend not to invest outside of their area of expertise.

Security

A financial instrument or investment contract that represents ownership, debt, or other rights in a company or asset. Securities can take various forms, such as shares of stock, limited partnership units, convertible bonds, or other equity or debt instruments.

Seed

The seed round is the first official round of financing for a startup. At this point a company is usually raising funds for proof of concept and/or to build out a prototype and is referred to as a "seed stage" company.

Seed Capital

The initial investment made to support the establishment and early-stage development of a new business or investment fund. It represents the capital provided by investors, often known as seed investors, to finance the initial expenses of a startup or the formation of a new private equity fund.

Seed Stage Financing

An initial state of a company’s growth characterized by a founding management team, business plan development, prototype development, and beta testing. Series A Ð first round of institutional investment capital, Series B – second round of institutional investment capital. Series C – third round of institutional investment capital

Senior Debt

A form of financing that has a higher priority claim on the assets and cash flows of a company compared to other types of debt. It is usually provided by banks or institutional lenders and carries a lower risk compared to subordinated debt or equity.

Series A – D+

Venture rounds that typically occur around certain milestones: a Series A round is raised after a seed investment has taken a company as far as it can go; a Series B may be when the company is reaching close to profitability but needs capital for hiring/development needs; Series C and D+ rounds are commonly known as late- stage rounds, and generally fall into the time when a company has a defined business model that has taken hold, is making significant revenues and is looking to expand at a large scale.

Share Appreciation Right (SAR)

A type of compensation granted to employees that does not rely on an exit event for a pay out. It is linked to the company's share price during a predetermined period. When the share price rises, employees receive the sum of the increase in shares or cash.

Share class

A classification that indicates the level of shareholder ownership in a company in relation to voting rights and liquidation preferences.

Share Incentive Plan (SIP)

A tax-advantaged share plan that offers companies the ability to award equity to employees. Shares awarded under a SIP are held in a trust and must be held for at least five years to qualify for tax-relief benefits.

Share option

A type of equity award which gives the option holder the right to buy a certain number of company shares in the future for a predetermined price – known as the exercise or strike price. Share options are not the same as shares.

Share option plan rules

The blueprint for an employee share scheme. Sets out company policies including option holders’ rights, the treatment of leavers and option lapsing. These rules apply to all employees on the scheme, and must be approved and adopted by the board of directors.

Share price

The price paid per single share of a company, as determined by the particular conditions of the transaction. Share price varies depending on factors including share class, investment round and shareholder type.

Share split

The process of dividing a share into two or more parts. The total value of the original share is unchanged, but split across multiple parts.

Shareholder register

A list of active owners of a company's shares and the number of shares they own. Different jurisdictions require different levels of detail to feature on the register. Also known as a register of members in the UK.

Shareholders' agreement

A document outlining shareholder rights and obligations, the relationship between shareholders, the financing and management of the company, and share-related policies. Designed to minimize disputes and protect shareholders in the event of a crisis.

Significant event

An event which affects a company’s value, and therefore its share price. Significant events call for a new company valuation to be performed. Known as a “material event” in the US.

Simple Agreement for Future Equity (SAFE)

An agreement between an investor and a company, giving the investor the right to future equity in the company without determining a specific price per share at the point of investment.

Size of Financings

Transactions defined according to their respective sizes. In the venture capital realm, there are four categories of deal size. Very small deals: Less than $500,000.Small deals: Less than $1 million. Mid-sized deals: Between $1 million and $5 million. Large deals: Greater than $5 million.

Stage

The stage of development a startup company is in. There is no explicit rule for what defines each stage of a company, but startups tend to be categorized as seed stage, early stage, mid-stage, and late stage. Most VCs firms only invest in companies in one or two stages. Some firms, however, manage multiple funds geared toward different stage companies.

Startup

A startup company is a company in the early stages of operations. Startups are usually seeking to solve a problem of fill a need, but there is no hard-and-fast rule for what makes a startup. A company is considered a startup until they stop referring to themselves as a startup.

Stock Options

1) The right to purchase or sell a stock at a specified price within a stated period. Options are a popular investment medium, offering an opportunity to hedge positions in other securities, to speculate on stocks with relatively little investment, and to capitalize on changes in the market value of options contracts themselves through a variety of options strategies. 2) A widely used form of employee incentive and compensation. The employee is given an option to purchase its shares at a certain price (at or below the market price at the time the option is granted) for a specified period of years.

Subscription Agreement

An application submitted by an investor wishing to join a limited partnership. The application is reviewed by the partnership's members before being approved to ensure that the investor has proper funding and meets specific requirements. The agreement sets forth the terms under which the investor will be bound if accepted.

T

Term Sheet

A non-binding agreement that outlines the major aspects of an investment to be made in a company. A term sheet sets the groundwork for building out detailed legal documents.

Total Enterprise Value (TEV)

TEV= Market Capitalization + Interest-Bearing Debt + Preferred Stock – Excess Cash

Total Invested/Invested Capital

The Total amount of called capital which has actually been invested in companies. In practice, this will be equal to the amount of called capital less amounts which have been used to pay fees, or which are awaiting investment.

Total Return

A phrase invented by the writer which refers to the return which an LP earns on the whole private equity allocation, as opposed to just that part of it which is at any one time invested in underlying buyout or venture companies.

Total Value

A Limited Partner’s total market value plus any capital distributions received.

Total Value to Paid In (TVPI)

The ratio of the current value of remaining investments within a fund, plus the total value of all distributions to date, relative to the total amount of capital paid into the fund to date. As defined in the current GIPS Standards (www.gipsstandards.org/standards/current/Pages/index.aspx), any recallable distributions should be included in the numerator of this ratio. Any reinvested capital (resulting from recallable distributions) should be included in the denominator. Perhaps the best available measure of performance before the end of a fund’s life.

Trade Sale

The sale of the equity share of a portfolio company to another company.

Tranche

1) Funds flowing from investors to a company that represent a partial round or an “early close.” Subsequent funds of the single round are generally under the same terms and conditions as the first tranche (or early close), however, those funding the early tranches may receive bonus warrant coverage, in consideration of the additional risk. (a French word meaning a slice or cutting). 2) Pieces, portions or slices of debt or structured financing. Each portion, or tranche, is one of several related securities offered at the same time but with different risks, rewards and maturities.

Treasury Stock

Stock issued by a company but later reacquired. It may be held in the company’s treasury indefinitely, reissued to the public, or retired. Treasury stock receives no dividends and does not carry voting power while held by the company.

Trigger event

An event that signals the conversion of an option, convertible loan note, warrant or other convertible grant into equity. A trigger event is typically an IPO, significant funding round or change of control in the company.

Turnaround

The process of revitalizing and improving the performance of a struggling or underperforming company.

U

UBTI

UBTI, Unrelated Business Taxable Income, is a concern to tax exempt investors in a hedge fund because the receipt of UBTI requires the tax exempt entity to file a tax return that it would not otherwise have to file and pay taxes on income that would otherwise be exempt, at the corporate rate. UBTI includes most business operations income and does not include interest, dividends and gains from the sale or exchange of capital assets. Hedge Funds trade their own securities and therefore the tax exempt investor’s share of such income of the hedge fund is not UBTI and not subject to federal income tax. However, hedge funds may subject tax exempt entities to UBTI under certain Circumstances where the hedge fund is borrowing or purchasing securities on margin. Such transactions may subject the tax exempt to UBTI tax.

ULPA

Uniform Limited Partnership Act.

Unapproved share option

A type of grant that doesn’t need pre-clearance from local tax authorities and isn’t limited to employees of the company. Unapproved options don’t provide any specific tax advantages.

Unfunded Commitment

Money that has been committed to an investment but not yet transferred to the General Partner.

Unicorn

A privately held startup company with a valuation of $1 billion or more.

Unrealized Investment

An underlying holding that is still active.

Unrestricted market value (UMV)

A company’s share price, determined by valuing shares to be granted under the EMI scheme as if they have no restrictions, and presuming all shares can be sold equally easily. The UMV is often higher than the actual market value (AMV).

Unvested option

An equity award that has been allocated to a particular grant holder, but is not yet available to convert into a common share. Until the terms of the vesting schedule are met, the grant holder only has the right to exercise the share option in the future.

Upper Quartile

The point at which 25% of all returns in a group are greater and 75% are lower.

V

Valuation

The estimated monetary value of a company, based on existing capital, previous raises, perceived market fit and growth potential. Valuations can be performed pre- money (i.e. before a funding round) or post-money. The process by which a company's worth or value is determined. An analyst will look at capital structure, management team, and revenue or potential revenue, among other things. Method of ascribing value to a company. In private equity, methods used include discounted cash flow, comparables and adjusted present value.

Valuation cap

The upper limit of a company’s valuation at which an investor can convert their convertible loan note or SAFE into equity. Often set to protect early investments.

Valuation Policy

The method or guidelines used by a private equity fund to determine the value of its portfolio assets.

Venture Capital

A specialized form of private equity, characterized chiefly by high-risk investment in new or young companies following a growth path in technology and other value- added sectors. Money provided by venture capital firms to small, high-risk, startup companies with major growth potential.

Venture Capital Financing

An investment in a startup business that is perceived to have excellent growth prospects but does not have access to capital markets. Type of financing sought by early-stage companies seeking to grow rapidly.

Venture Capital Operating Company (VCOC)

A term used in the ERISA regulations.

Venture Capitalist

An individual investor, working for a venture capital firm that chooses to invest in specific companies. Venture capitalists typically have a focused market or sector that they know well and invest in. A financial institution specializing in the provision of equity and other forms of long-term capital to enterprises, usually to firms with a limited track record but with the expectation of substantial growth. The venture capitalist may provide both funding and varying degrees of managerial and technical expertise.

Vesting

The process of earning an asset or equity award like share options. The grant is awarded over time according to a vesting schedule. When options are fully vested, the grant holder is entitled to exercise the full grant. When an employee of a company gains rights to stock options and contributions provided by the employer. The rights typically gain value (vest) over time until they reach their full value after a pre-determined amount of time. For example, if an employee was offered 200 stock unites over 10 years, 20 units would vest each year. This gives employees an incentive to perform well and stay with the company for a longer period of time.

Vesting schedule

A schedule which determines when a grant holder is entitled to their equity award. Typically begins with a cliff, after which shares vest at regular intervals for the duration of the schedule. A four-year vesting schedule with a one-year cliff is one of the most common arrangements.

Vesting Schedules

Timetables for stock grants and options mandating that entrepreneurs earn (vest) their equity stakes over a number of years, rather than upon conversion of the stock options. This guarantees to investors and the market that the entrepreneurs will stick around, rather than converting and cashing in their shares.

Vintage Year

The year of fund formation and/or its first takedown of capital. By placing a fund into an particular vintage year, the Limited Partner can compare the performance of a given fund with all other similar types of funds form in that particular year.

Vintage Year Returns

Vintage year returns show (in respect of any one vintage year) the compound return of all constituent funds formed during the vintage year, from the vintage year to the date specified.

Virtual share

An equity award that entitles the shareholder to a cash payment in case of an exit event. The cash payment corresponds to the market value of company shares at that point, minus the hurdle price where applicable. Also known as a phantom share.

Virtual share option plan (VSOP)

A share scheme for awarding virtual share options to employees under the German legal system.

Voluntary Redemption

The right of a company to repurchase some or all of an investors’ outstanding shares at a stated price at a given time in the future. The purchase price is usually the Issue Price, increased by Cumulative Dividends.

Voting Right

The common stockholders’ right to vote their stock in the affairs of the company. Preferred stock usually has the right to vote when preferred dividends are in default for a specified amount of time. The right to vote may be delegated by the stockholder to another person.

W

Warrant

A type of security that entitles the holder to buy a proportionate amount of common stock or preferred stock at a specified price for a period of years. Warrants are usually issued together with a loan, a bond or preferred stock –and act as sweeteners, to enhance the marketability of the accompanying securities. They are also known as stock- purchase warrants and subscription warrants.

Wash-Out Round

A financing round whereby previous investors, the founders, and management suffer significant dilution. Usually as a result of a washout round, the new investor gains majority ownership and control of the company. Also known as burn-out or cram-down rounds.

Waterfall analysis

The process of calculating possible future payouts for each shareholder in the case of an exit event.

Waterfall Calculation

The method used to distribute investment returns among different stakeholders in a fund or investment structure. The waterfall defines the order and priority in which profits are allocated and distributed. Typically, the waterfall calculation outlines a series of steps or tiers that determine how profits are distributed among limited partners (investors) and the general partner (private equity firm). It may include provisions such as the return of capital, preferred returns, catch-up provisions, and profit-sharing arrangements. The waterfall calculation ensures a systematic and fair distribution of profits based on the agreed-upon terms and priorities outlined in the fund's partnership agreement.

Weighted Average Anti- dilution

The investor’s conversion price is reduced, and thus the number of common shares received on conversion increased, in the case of a down round; it takes into account both: (a) the reduced price and, (b) how many shares (or rights) are issued in the dilutive financing.

Wet Close

Venture capital closing where you issue a capital call.

Williams Act of 1968

An amendment of the Securities and Exchange Act of 1934 that regulates tender offers and other takeover related actions such as larger share purchases.

Working Capital

The capital required to fund a company's day-to-day operations, including cash, inventory, and accounts receivable.

Workout

A negotiated agreement between the debtors and its creditors outside the bankruptcy process.

Write-off

The act of changing the value of an asset to an expense or a loss. A write-off is used to reduce or eliminate the value an asset and reduce profits. The write-down of a portfolio asset to the value of zero, with the result that the private equity investor or investors go without proceeds upon disposition.

Write-up/Write- down

An upward or downward adjustment of the value of an asset for accounting and reporting purposes. These adjustments are estimates and tend to be subjective; although they are usually based on events affecting the investee company or its securities beneficially or detrimentally.

Y

Year-to-Date

The calendar year that runs January 1st to December 31st.

Yield

The return or income generated by an investment over a specific period, typically expressed as a percentage.

Z

Zombie

A portfolio company that is no longer actively managed or receives meaningful attention from its private equity sponsor. Zombies are typically underperforming or distressed companies that have not been able to achieve the desired financial results or attract a buyer or exit opportunity.

#

401(K) Plan

Type of qualified retirement plan in which employees make salary reduced, pre-tax contributions to an employee trust. In many cases, the employer will match employee contributions up to a specified level.

409A valuation

An independent assessment of the fair market value (FMV) of a company’s ordinary shares, named after section 409A of the IRS Internal Revenue Code (IRC).